The adviser group 2 session on Monday 23 May comprised Owen Clay, corporate lawyer for Arcadia and Traveta (Linklaters); Steve Denison, auditor of Traveta and its subsidiaries, including BHS (PwC); and Anthony Gutman, ‘informal’ adviser to the Arcadia Group (Goldman Sachs).
The questioning focused on the solvency position of BHS at the time of the acquisition, the level of due diligence undertaken on the eventual acquirer (Retail Acquisitions Ltd) and the recognition of the pensions deficit in the deal negotiation.
Steve Denison was quizzed as to the processes undertaken to satisfy PwC that BHS was a going concern. He did not consider that BHS presented a higher than average risk on audit and did not consider that the management charges (equal to around 7% of turnover) were excessive. He was asked why PwC did not issue what is known as ‘an emphasis of matter’, as is usual if there is any material uncertainty. He told the committees that if there had been no deal this would only have become necessary if Traveta's support fell away. In terms of a deal, three factors needed to be kept in mind:
- the existing management team of BHS was having some success in driving out cost and reducing the cash requirement to fund it as a trading entity;
- the deal as he knew it would provide extra cash and assets from the seller (Traveta); and
- new cash was coming in from the buyer (Retail Acquisitions).
Mr Denison confirmed that for audit purposes, PwC was only concerned with the management structure of BHS and not the potential new owners. When questioned, he confirmed he was perfectly satisfied that PwC had met ethical standards in signing off the accounts.
Owen Clay was quizzed as to the level of due diligence undertaken on the potential acquirer. He explained that his duties were to know his customer and not the ultimate buyer, which was the responsibility of Olswang (Retail Acquisition's corporate lawyers). He did, however, explain that he would be bound by the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007.
Under questioning, Mr Clay had stated that ‘businessmen do not employ deal lawyers to vet the business acumen of their counterparts’. The committees then asked why in making this statement did he ask Olswang whether they had assessed if Mr Chapell had any sense of impropriety. Mr Clay said the purpose was to establish what customer due diligence had been carried out and whether it had given rise to concerns of impropriety. He was satisfied, based on the conversation with his Olswang counterpart, that a very detailed and thorough due diligence process had been conducted. He later made it clear that his conversation with Olswang was about impropriety only and was not about business acumen. He also went on to stress that BHS was not just ‘going over to a guy who knew nothing about retail’ as the management team was being retained.
On further questioning Mr Clay was asked whether or not he felt any responsibility for the failure of the two law firms to discover ‘the most obvious thing about Mr Chapell’. In reply he repeated that the duty does not extend to enquiries about other people's customers, but in this case and given the particulars terms of the contract, Linklaters did something that was in his experience unusual by asking Olswang what due diligence had been carried out.
Next came Anthony Gutman, whose statement appeared to frustrate the committees. Despite dispensing what appears to have been a considerable amount of ‘advice’ relating to the deal going back to December 2014 and over a five month period, Mr Gutman maintained that Goldman Sachs was not advising on the deal but was simply providing ‘informal advice’, having declined to be formally engaged for commercial reasons - it seems that the deal was just not big enough for Goldman Sachs. He was insistent that Goldman Sachs only provided ‘preliminary observations’, seemingly under a general retainer with Arcadia.
Mr Gutman told the committees that Goldman Sachs saw the initial proposals and went back to Arcadia with their observations indicating that:
- the buyer did not have any retail experience;
- the proposal was highly preliminary and lacking detail; and
- the bidder had a history of bankruptcy.
They learned about the bankruptcy from Riverock, the advisor to Retail Acquisitions, then known as Swissrock. Goldman Sachs in turn conveyed this information to Paul Budge (Arcadia's Group Finance Director) although it was not given in writing. Paul Budge’s questioning will be covered in a further update.
Following substantial grilling, Mr Gutman was backed into a corner by Richard Fuller who said, "Goldman Sachs' name means a lot, so I think it is important for you to explain: in a similar situation would you not be waving the red flag?" Mr Gutman responded "in a situation at an early stage in a transaction with many months to follow before the deal could hypothetically close, we would identify the risks and say 'these risks need to be assessed and considered in the round'". He was asked by the committees to provide them with the "considerable amount of informal advice over a five month period".
Following Mr Gutman’s questioning, they were all asked about the extent or recognition of the pensions debt as part of the deal and asked who was calling the shots to withdraw Project Thor (see our last update). Steve Denison did not believe that the BHS management had anything to do with Project Thor and this appears to be consistent with the adviser group 1 session. Anthony Gutman did not believe that the existence of the PPF was an incentive for bad things to happen and provides ‘moral hazard’.
Our readers should note that this is a very short and selective analysis of the session. We will comment upon the further sessions in the next few days.